The high-flying Mega and Large Cap Growth stocks saw profit-taking last week, apparently using the rapid rise in 10-year and 30-year US Treasury Yields as an excuse. This short-term selling is sector - stock specific and really brought the highflyers closer to earth. We have seen bouts of selling or profit-taking a few times in the past twelve months, with these stocks only to resume leadership due to their underlying fundamentals and market drivers. Nevertheless, there is sector rotation taking place with value stocks, notably with Energy, Financials, Materials asserting dominance over tech, consumer discretionary, staples, utilities, health care, and real estate. Small and Mid (both growth and value) are in strong Bullish trends which for now mitigates concern about a broad market downturn.
We wrote last week "So far the rise in yields has been good for the equity markets and not seen as a threat to economic growth in terms of higher taxes and inflation." The rise in interest rates is correlated to the big gains in banking stocks, particularly Regional Banks who are more directly tied to economic activity and who borrow short and lend long, leading to profits.
US, European and Emerging Markets remain in strategic Bullish trends. Small and Mid-caps, Emerging Markets remain overbought level 3.
Equity Styles: Large Cap Growth losing strength vs. Large Cap Value. Small and Mid-cap stocks (particularly Value) continue outperforming Large Caps.
Ranked Sectors: Leaders - Energy, Transportation Industry, Financials, Telecom Services; Laggards - Real Estate, Health Care, Consumer Staples, Utilities.
Interest Rates: 30-year and 10-year US Treasury Yields rose to 2.19% from 2.01% and 1.37% from 1.20% respectively, from last week. The 10-year – 2-year Yield curve is strongly positive. Investment Grade Bonds moved to Bear Alert.
Currencies: The Australian Dollar, the British Pound and the Euro all strengthened; the Yen continues weakening; the US Dollar resumed falling in a Bearish trend. Gold remains in a Bearish downtrend.
Short term Market indicators, particularly for FANG and Large Cap Growth stocks weakened sharply last week; Intermediate and Long-Term indicators remain Bullish.